Tuesday, June 14, 2011

Furniture eVolution – Part Deux – 11 Observations Shaping the Future

Furniture Manufacturers in the US and the Great Smack Down 
I’ve been in the furniture industry for too many years... 4 as an analyst, 18 working for a manufacturer. As a manufacturer we’ve seen good times and more recently, bad times. It hasn't been much fun. Why? Is it just the Great Recession or is there something more going on? I believe the world is changing as we know it - and right in front of our eyes.

What follows is a snapshot of some underlying trends and observations that will produce the winners and losers of the next decade, not only in the furniture industry, but in others as well:

1. Post Great Recession Thinking – Like post-Great Depression, if you have a job, you are inclined to be more thrifty, more careful with the money you have. Some purchases, like furniture can wait...they are easily deferrable. Unfortunately for the industry, furniture is the most deferrable purchase - the first cut out of the budget during a recession, and the last added back. 

Bread line in the Great Depression
2. Less Disposable Income – High chronic unemployment, salary freezes, no bonuses, reduced or eliminated pensions and benefits, and lower wages from temp position jobs will dampen spending for many of us going forward. With lower profits, many employers can’t afford to be as generous as they’ve been in the past.

3. High Gas/Energy prices will burn more discretionary income in our future, and lead to smaller more efficient homes (and cars) being purchased, which means less and smaller furniture. Plus, the psychological hit of paying $120 to fill up your SUV impacts discretionary spending.

4. Home Sales Down – Traditionally New Home sales and resales drive furniture purchasing. Sales are down due to several factors, but Generations X and Y, the next generation of home buyers (and half of the US furniture market) are rethinking the investment, despite lower interest and home prices, and rising rental costs. What is going on with Gen XY?

  •  Urban Migration – GenXY’s are flocking to cities. 50% of the population live in cities now, that number will rise to 70% by 2050.
  • Job Mobility – GenXY’s generally don’t want to be tied down to a home (or children or a marriage perhaps) because they are a job hopping generation on the move. Corporations are offering fewer perks to keep people in one job for a career.
  • Investment Rethinking – The R/E bubble has burst yet again and with it, a fundamental challenge to the idea, perpetuated by some, to “buy all the house you can afford”. Many walked away from their homes as their home equity vanished overnight.
  • New Spending Priorities – GenXY are more interested in spending on experiences than things, and when they do spend on stuff, it’s electronics, cars, or trips, not furniture.
  • New Household Formation Down - Normal 1 to 1.5 milllion new households are created a year, fueling home sales and apartment rentals that in turn fuel furniture sales (traditionally with a 6 month lag). Household formations are down by 1/3. Why? The recession can account for most of this, but there could be contributing factors that are more long lasting.

5. Technological Big Bang - Technology is reducing the need for furniture, especially big, high ticket furniture, due to electronic storage and playback of data, music, etc. See my earlier post. This trend will change what consumers want in furniture going forward. The future belongs to smaller, multi-function, more modern/contemporary furniture for the IKEA generation.

6. Generational Buying Gap – As Boomers age out and naturally reduce their spending on furniture and downsize their homes, there is a buying gap until the next huge generation, Gen Y, has the income to replace the Boomers as big consumer spenders. This gap could be a decade or more, depending on whether a long-term generational shift in spending priorities materializes. Also, those under 35 have 68% less net worth than their predecessors in 1984, due to lower wage jobs and higher college debt. This will continue to impact spending by Gen XY for years to come.

7. Competitive Pressures:
  • Growing thrift, consignment store, and Craig’s List sales will put more pressure on traditional retailers, more will close their doors, making furniture more difficult to distribute by manufacturers. As Boomer’s scale back and empty out their homes, garages, and storage units, and as their children choose smaller and more urban homes, used furniture will continue to be a compelling value/style story to compete with new furniture sales. Gen XY doesn't mind giving old furniture a makeover with a bold paint job or new fabric. This is a DIY generation.
  • Online Sales – preferred by GenXY, since they’ve grown up on computers. Online sales outlets like PB, Room and Board, and IKEA will continue to grow their market share. This generation generally doesn't like shopping in traditional furniture stores for many reasons. Online shopping is reducing margins for B&M retailers and comparison apps like Red Laser ar making searching for best price easier for techno savvy buyers.
  •  Vertical Integration - Markets favor the most efficient, lowest cost producer, which means Asian manufacturers will sell directly to consumers. Manufacturer/retailers like IKEA and Ethan Allen also have a competitive advantage.
  •  Specialty Niche – Consumers are increasingly looking for unique, local, autobiographical, aspirational home décor, and they will find it on sites like Etsy, where consumers are willing to pay more for unique items their neighbors don’t have. And entrepreneurial minded GenXY’s can make a living designing and making home décor and selling it online.
  •  Commoditization – Increasingly, furniture is commoditized. Décor has to be uniquely designed or target a niche not exploited by others.
  • Social Networking - Gen XY consumers rely more on social networking to zero in on good products and services, making traditional advertising less effective. Corporations are losing control of the message. Transparency will make the good, the bad, and the ugly increasingly evident to buyers.

This Country is going to Hell?
8. The Fox Factor – Polarization is profitable for Fox and many talk show hosts, and they are fanning the flames of government distrust, lowering consumer confidence, and depressing retail sales. The government debt wrangling weighs on consumers’ minds and reminds them they have their own debt to pay down, further impacting retail sales.
"Is this some kind of a BUST? Yes, very nice, but we don't have time for that now" : )
9. The Bust Effect – When times were booming, like they were pre-recession, everyone can make money, everything sells -- so there is no need to design really great stuff, there is no great incentive to push the envelope, and products, even art, can get very commercial and boring. Consumers load up on everything they want, so they wake up one day and they’ve bought it all, and there is nothing more compelling in the marketplace they want to buy. Manufacturers’ response to the recession is to design more “tried and true” things that sold for many years, not wanting to take the risk, given falling sales and profits -- so the result is even more boring product that doesn’t sell in the marketplace. Humm, sounds like they need some new ideas…

10. Global Warming - Whether you believe in Global Warming or not depends largely on to whom you listen and trust for information, but if you believe in science, and most of us do, 98% of the world's climate scientists as well of most of the world's governments are taking this issue seriously. So what does this mean for the furniture industry? Increasingly, government resources will be needed to combat the effects of storm damage in the next 100 years, with a likely increase in taxes. Also, higher insurance premiums will take more disposable income out of our pockets. Finally, smaller more energy efficient homes will be preferred to reduce their carbon footprint. Population displacement, property damage,and higher priced goods and services will also have an impact.

11. Short Term Thinking – When times were good, many execs in the industry lined their pockets with  pay raises, bonuses, and stock options. Instead of investing in new talent, new equipment and technology to make their company stronger long-term, they became complacent, since business and profits were good. As a result, most of the US furniture industry is not competitive in a world market. That can change, but it will take an investment not only in equipment and technology, but in forward looking talent.

All is not Doom and Gloom. A challenging landscape creates new and exciting opportunities for the furniture industry. As tastes and needs for home fashion change, companies that have the vision, leadership and talent to adapt will prosper. Companies that cannot adapt, will, like the dinosaurs, die out and provide the fertilizer for a new breed of young and adaptive entrepreneurs to grow. As the Perfect Storm changes the retail landscape, perhaps permanently, the question is this, how will the industry respond?

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